Stocks rally on bank chief's caution

The mainland stock market rallied on Friday after central bank Governor Zhou Xiaochuan said the bank will maintain a prudent monetary policy but adjust liquidity in the market appropriately.

The benchmark Shanghai Composite Index rose by 1.5 percent to close at 1,979.21 points. Turnover was 77.5 billion yuan ($12.6 billion), down from 84.3 billion yuan on Thursday.

Sectors including banking, brokerages and property led the rally.

ICBC, the world's biggest bank by market capitalization, saw its share price rise by 5.51 percent to 4.02 yuan. Vanke, the country's leading real estate developer, rose by 8.36 percent to 9.85 yuan.

The Shanghai Composite Index fell by 13.97 percent in June, the biggest monthly retreat since last year. Market capitalization of the A-share market shrank by 3.47 trillion yuan in the month, mainly due to panic triggered by a credit crunch since mid-June.

A spokesman for the China Securities Regulatory Commission said on Friday the A-share market has been steady after a sharp decline this week caused by temporary and sudden factors.

The spokesman said the Chinese capital market has great potential and there are many opportunities in the market now and in the near future.

Analysts said Zhou is trying to soothe a market which has had a severe case of the jitters since the credit crunch, which sent the interbank interest rate to historic highs and caused panic over increased risks from the shadow banking system.

Merrill Lynch said in a report on Friday that it believes the worst for liquidity is over and a considerable easing can be expected in coming weeks.